Variable Annuities With Guarantees Hold Allure For Seniors
The Federal Reserve recently left its interest rate levers alone again. And while interest rates have bounced a bit since June, they are still historically low.
For seniors, this has meant less income kicked off invested assets than just a few years ago. Much less.
This situation might entice some seniors to take on a bit more credit risk or invest for a longer duration to pick up additional yield. But, does stretching toward more risk extend beyond fixed income opportunities? More specifically, are equities a haven for seniors?
If variable annuity sales are an indicator of interest in the equity markets, the answer is yes.
Many insurance companies, including our own, have experienced strong interest in variable annuities by individuals age 50 and above. I know of some companies that have an average variable annuity issue age well into the 60s.
This shouldnt come as a surprise. Longer life expectancies have opened the window of opportunity for seniors to keep some portion of assets in the equity markets. In past eras, the traditional time horizon for equity investing ended at or near retirement, but newer thinking invites the possibility of investing in the markets at much older ages.
One could think of the current strategy for seniors in another way, based on the widespread concept of laddering bonds.
Such laddering is a widely accepted means of balancing the greater yield (and risk) of longer durations with the need always to have a portion of assets available to invest at a current interest rate. Equities are not actually used in a laddering strategy, but one might position equities as, perhaps, the farthest rung on a seniors financial ladder. Treat the equity markets as the investment providing the opportunity for the greatest long-term growth (with the acknowledged extra risk).
Bringing this back to variable annuities, the variable annuity product can be a good fit for older clients who want this exposure to equity markets.